In most developed countries, government massively funds through academic grants, government laboratories, tax credits and research contracts: government R&D alone can often reach 1% of the GDP. In Canada, the government loves tax credits. In the US, the government spends about 60% of all its R&D funding on the military.
Is this government funding a good thing?
What economists tell us is that R&D funding is probably the most important factor determining economic growth. If you want economic growth, then you should be favorable to more research funding. And therefore, it follows that government funding for research ought to be a good idea.
The problem is that it is private R&D that contributes to economic growth, not government R&D:
The overall rate of return to R&D is very large, perhaps 25 percent as a private return and a total of 65 percent for social returns. However, these returns apply only to privately financed R&D in industry. Returns to many forms of publicly financed R&D are near zero. (Sveikauskas, Bureau of Labor Statistics, Washington, 2007)
The ubiquitous and fairly pessimistic finding which emerges from the literature is that privately funded R&D contributes significantly to output growth, whereas publicly financed R&D has little or no direct effect. (Capron and van Pottelsberghe, 1998)
(…) regressions including separate variables for business-performed R&D and that performed by other institutions (mainly public research institutes) suggest that it is the former that drives the positive association between total R&D intensity and output growth. (…)
(The Sources of Economic Growth in OECD Countries, 2003).
So the argument that economists have to make to justify government spending on R&D is that when the government pays for research, it entices companies to invest more. Thankfully, the correlation between public spending on R&D and private spending is good, except maybe for government-specific programs (such as the military R&D that the US is so fond of). As a policy, it seems that it makes sense to entice individuals and companies to do more research. Nevertheless, some economists remain cautious:
(…) the government should be careful in stimulating higher research expenditures. Recent rates of return on R&D are estimated to have reached an all-time low spanning the last 45 years, (…) Firms are also not convinced any more that their R&D investments will yield high returns (…) (Lang, 1999)
Enticing private companies to do more R&D is fine, but are there strong mechanisms turning academic research into more private-sector R&D? There is a correlation, but is there a causal relationship? Most academic research is far removed from economic activities and few professors turn their research into viable products.
Do countries that publish more also see more growth? Yes they do (but wait before concluding):
The correlation between GDP and publications is (…) high (…) for all countries in the sample analyzed here (77.7–99.6%) (Lee et al., 2011)
This correlation can mean one of two things (or a mix of both):
- Richer countries can afford more academic research.
- More academic research makes country richer.
Which is it?
We have some historical evidence in this respect.
In the 17th and 18th centuries, France had the best funded intellectuals in the world. Meanwhile, the British government did not subsidize science and scholarship much. Yet it is in Great Britain that we saw the rise of the industrial evolution and of modern science.
Similarly, the US saw a massive economic growth from its early days all the way to WWII… without any public funding for R&D. While other countries like France kept on subsidizing scholarship, it did not put them ahead economically. The US became the dominant world power in 1950 without having invested much at all, as a government, in science and engineering. The US only started investing seriously in research at the end of the 1950s, because it feared the USSR. The USSR was investing in engineering through the state apparatus and the US felt that it had to match it. Remarkably, these massive investments were not followed by an increase in growth. And we know what happened to the USSR.
Of course, today, the US is subsidizing academic research generously: according to some sources, the US is twice as generous as Europe with respect to per capita government R&D. But is the US a wealthy country because of these subsidies, or can it afford these subsidies because its wealth?
Economists can answer these questions using Granger causality tests. Granger is the economist who showed that we could use the analysis of time series data to establish causality between variables.
And the evidence indicates that, for wealthy countries, government funding for academic research does not cause economic growth:
For European Community member states, the US and Japan correlation between the GDP and number of publications of a given year proved to be non-significant. (…) Studying data referring to consecutive time periods revealed that there is no direct relationship between the GDP and information production of countries. (Vinkler, 2008)
For [rich nations], there is no significant causal relationship between research production and the economy. (Lee et al., 2011)
Conclusion: There are good reasons to pursue academic research. However, academic research is more of a gift economy than an economic growth policy, at least for rich countries. Richer countries can afford to do more academic research, but academic research is not what makes you rich (I should know!).
Further reading: For supporting evidence, see Sex, Science And Profits by Terence Kealey and Faith Based Science Policy by Roger Pielke, Jr. For contrarian evidence, see Federal Support for Research and Development and The iPad wouldn’t be here without federal research dollars (via Greg Linden). Moreover, you may want to have a look at Where Good Ideas Come From by Steve Johnson for an anecdote-based analysis.
Disclosure: I have worked in industry R&D, in government R&D and as an academic researcher. I have held a federal research grant for over 10 years. My job would not exist without government funding.